Full Judgment Text
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PETITIONER:
COMMISSIONER OF EXCESS PROFIT TAX, KANPUR
Vs.
RESPONDENT:
KALYAN MAL PHOOL CHAND, NAGAR GANJ, KANPUR
DATE OF JUDGMENT13/03/1987
BENCH:
MUKHARJI, SABYASACHI (J)
BENCH:
MUKHARJI, SABYASACHI (J)
NATRAJAN, S. (J)
CITATION:
1987 AIR 2140 1987 SCR (2) 601
1987 SCC (2) 458 JT 1987 (1) 691
1987 SCALE (1)563
ACT:
Excess Profit Tax Act, 1940---Sections 2, 5-7--’Ac-
counting period’--’Chargeable account period’--’Standard
profits’--What are-Deficiency in profits--Setting off--Basis
of determination.
HEADNOTE:
The assessee was an unregistered firm carrying on busi-
ness of manufacture and sale of Katechu. The firm carried on
the work of extraction of Katechu in Nepal and sales were
affected in Kanpur. It had first taken a jungle on lease and
Katechu were extracted from October 1940 to September, 1941.
Sales were effected from 30th May, 1941 to 29th September,
1941. Thereafter, another jungle was taken on lease and
Katechu were extracted from 23rd November, 1942 to 6th
November, 1944. The sales were effected between 26th July,
1943 to 4th April, 1944.
The assessee claimed set off of deficiency of profit for
the periods 20th October, 1940 to 17th October, 1941 and
23rd November, 1942 to 31st March, 1943 on the ground that
the business carried on during the chargeable accounting
period 1-4-1943 to 31-3-1944 was not separate to and dis-
tinct from the business carried on in 1940-41.
The Excess Profit Tax Officer did not set off the defi-
ciency of profits that accrued in respect of the period
1940-41 out of the profits for the chargeable accounting
period from 1-4-1943 to 31-3-1944, and held that the busi-
ness carried on during October, 1940 to October, 1941 was
completely different from the business carried on during the
aforesaid chargeable accounting period.
So far as the deficiency pertaining to the period Novem-
ber, 1942 to 31st March, 1943 was concerned, the manufactur-
ing operations started on or about 23rd November, 1942 and
the sales started on 26th July, 1943. Katechu produced from
23rd November, 1942 to 31st March, 1943 remained in stock
till the last date of the chargeable accounting period.
namely, 31st March, 1943. As the assessee did not, maintain
any books of account, the provisions of s. 13 of the Income
Tax
602
Act, 1922 were applicable. The Revenue, therefore, valued
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the stock-intrade at cost and held that there could be no
profit or loss during the chargeable accounting period.
In appeal, the assessee urge that deficiency in profits
pertaining to the chargeable accounting periods from Octo-
ber, 1940 to 31st March, 1941, and 23rd November, 1942 to
31st March, 1943 should be allowed a set off in computing
the excess profits and as there were no profits during the
said chargeable accounting period, the standard profits
became the deficiency of the said two years which should
have been allowed set off and that as manufacturing opera-
tions were carried on during the said periods, it could not
be said that the assessee did not carry on any business.
The Appellate Assistant Commissioner found that the
constitution of the firm during the chargeable accounting
period was the same as in 1940-41, that the accounts were
maintained in the same fashion and the same business was
carried on, that the assessee had effected sales only during
30th May, 1941 to 29th September, 1941 and held that the
assessee was entitled to set off in respect of the deficien-
cy of profits. He, therefore, confirmed that there were no
profits and losses during the chargeable accounting period
ending on 31st March, 1941 and as such there could be no
deficiency of profits. The assessee was, therefore, held to
be entitled to a set off of the deficiency only for the
chargeable accounting period ending on 31st March, 1942
which consisted of the period 1st April. 1941 to 29th Sep-
tember. 1941.
The Tribunal, however, held that no profits accrued
unless sale was effected and accepting the contention of the
Revenue that no part of profits, which accrued during the
said two chargeable accounting periods could be charged and
were in fact not so charged to income-tax, as no sales were
effected, the Act itself did not apply and confirmed the
order of the Appellate Assistant Commissioner.
The High Court divided the entire period of manufacture
and sales to determine the question whether there was manu-
facturing activity and sale; (1) October 28, 1940 to March
31, 1941, failing in the financial year ending March 31,
1941, Katechu was manufactured but there was no sale; (2)
April 1, 1941 to September 29, 1941, failing in the finan-
cial year ending March 31, 1942; sales took place from May
30, 1941 to September 29, 1941; (3) November 23, 1942 to
March 31, 1943 failing in the financial year ending March
31, 1943; Katechu was manufactured but there was no sale;
(4) April 1, 1943 to March 31,
603
1944, failing in the financial year ending March 31,. 1944;
sale took place from July 26, 1943 to March 31, 1944; (5)
April 1, 1944 to April 4, 1944, failing in the financial
year ending March 31, 1945; sales were effected from April
1, 1944 to April 4, 1944 when the business was discontinued.
It held that while there was manufacturing activity there
was no sale during the financial years ending March 31, 1941
to March 31, 1943, that the profits earned upon sales ef-
fected during the chargeable accounting period ending 31st
March, 1944 must be apportioned between the manufacturing
activity during the chargeable accounting period ending 31st
March, 1943 and the sales during the chargeable accounting
period ending 31st March, 1944 and that the deficiency of
profits must be set off in computing the excess profits for
the chargeable accounting period ending 31st March, 1944.
The High Court, therefore, did not accept the opinion of the
Tribunal and held that the assessee was entitled to a set
off of deficiency of profits relating to the periods 28-10-
1940 to 31-3-1941 and 23-11-1942 to 31-3-1943 from the
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profits of the chargeable accounting period 1-4-1943 to
31-3-1944.
Allowing the Appeal,
HELD: 1. The scheme contained in the Excess Profits Tax
Act is a legislation intended to tax the profits of certain
business in excess of a certain limit as provided in that
Act. It is, therefore, complementary to the Income Tax Act
by its very nature. [610D]
Commissioner of Income Tax, Bombay v. Raipur Manufactur-
ing Co., Ltd., 14 ITR 725 at 733, followed.
2. In order to work out the scheme of the Act, there
must be proper dovetailing of the concept of ’accounting
period’. ’chargeable accounting period’ and basic scheme of
the Income-Tax Act bearing in mind that excess profits are
excess of profits which were intended to be mopped up during
the war period, to be taxed separately and differently.
[612H; 613A-B]
3. If the right to receive those profits had accrued or
arisen subsequently then even though they had accrued or
arisen by reason of work done during the chargeable account-
ing period, these were not liable to be treated as the
profits of that chargeable accounting period. [613C]
4.Whether the profits in the one case could be identi-
fied with the profits in the other would be determined by
reference to the period in which those accrued or arose. The
profits during the chargeable
604
accounting period must be computed under the Excess Profits
Tax on the same basis as are profits for an income-tax
assessment. [613D-E]
Haji Rahmat Ullah and Co. v. Commissioner of Income-tax,
U.P., 59 I.T.R. 109, relied upon.
5. It has to be clearly borne in mind that the Act is
not an entirely different Act in the sense that it proceeds
upon the concept completely different from the notions of
Income Tax and has its source in an entirely different tax
concept. More profits which were likely to have been earned
due to profits, these were made subject to excess profits.
[613E-F]
6. Though profit in a composite transaction could be
apportioned as between manufacture and sale in the same
accounting year, such an apportionment is not permissible
when one part of the transaction, i.e. manufacture, falls in
one chargeable accounting period and falls in another part
of the accounting period i.e. the trading operations i.e.
falls in another accounting period, then set off deficiency
in profits under section 7 of the Act is permitted but a
necessary precondition was that profit must be made in the
accounting period to which the deficiency relates. [613G-H;
614A]
7. The excess profit under the Act is profit determined
under the Income Tax Act subject to prescribed adjustments.
If the income tax assessment discloses nil profits, no
separate profit can be determined independently under the
Act. [614A-B]
8. It is a general principle, in the computation of the
manual profits of a trade or business under the Income Tax
Acts, that those elements of profits or gain, and those
only, enter into the computation which are earned or ascer-
tained in the year to which the enquiry refers; and in like
manner, only those elements of loss or expense enter into
the computation which are suffered or incurred during that
year. [614C-D]
Edward Collins & Sons Ltd. v. The Commissioners of
Inland Revenue, 12 T.C. 773 at 780, followed and Commission-
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er of Incometax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay,
18 I.T.R. 472, distinguished.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1375 of
1974
605
From the Judgment and Order dated 21.2. 1971 of the
Allahabad High Court in Excise Profit Tax Reference No. 55
of 1968.
Dr. V. Gauri Shankar and Miss A. Subhashini for
the Appellant.
S.T. Desai, Harish Salve, Mrs. A.K. Verma and D.N.
Mishra for the Respondent.
The Judgment of the Court was delivered by
SABYASACHI MUKHARJI, J. This appeal is directed against
the judgment and order of the High Court of Allahabad dated
21st February 1971. It relates to the assessment under the
Excess Profits Tax Act, 1940 (hereinafter called the ’Act’).
The assessee was an unregistered firm carrying on business
of manufacture and sale of katechu. The chargeable account-
ing period was 1-4-1943 to 31.3. 1944. There were two
partners of the assessee firm, namely, L. Phoolchand and M/s
Biharilal Balkishan each having profits in proportion of 11
annas and 5 annas respectively. The work in connection with
the extraction of Katechu was carried on in Nepal by 1..
Phoolchand and the sale of Katechu were effected by M/s
Biharilal Balkishan at their shops in Kanpur. The assessee
firm did not maintain any books of account and the entire
record of the business transaction was maintained in the
books of M/s Biharilal Balkishan in the account styled
"Kalyanmal Phoolchand".
The assessee firm had taken a jungle on lease for this
purpose and had extracted Katechu from October, 1940 to
September, 1941. The sales of katechu extracted were effect-
ed from 30th May, 1941 to 29th September, 1941. Thereafter
another jungle was taken on lease in November, 1942 and
Katechu were extracted from 23rd November, 1942 to 6th
November, 1944. The sales in this case were effected between
26th July, 1943 to 4th April, 1944. The High Court divided
the entire period of manufacture and sale as follows:
1. October 28, 1940 to March 31, 1941, failing in the
financial year ending March 31,1941. Katechu was manufac-
tured but there was no sale.
2. April 1, 1941 to September 29, 1941, failing in the
financial year ending March 31, 1942. Sales took place from
May 30, 1941 to September 29, 1941.
606
3. November 23, 1942 to March 31, 1943, falling in the
financial year ending March 31, 1943. Katechu was manufac-
tured but there was no sale.
4. April 1, 1943 to March 31, 1944, falling in the finan-
cial year ending March 31, 1944, sales took place from July
26, 1943 to March 31, 1944.
5. April 1, 1944 to April 4, 1944, falling in the finan-
cial year ending March 31. 1945, sales were effected from
April 1, 1944 to April 4, 1944, when the business was dis-
continued.
Therefore, while there was manufacturing activity there
was no sale during the financial years ending 31st March,
1941 and 31st March, 1943. The dispute in this case is with
regard to the set off of deficiency of profit relating to
the periods 20th October, 1940 to 17th October, 1941 and
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23rd November, 1942 to 31st March, 1943.
The Excess Profit Tax Officer did not set off the said
deficiency of profits that accrued in respect of the period
1940-41 out of the profits for the chargeable accounting
period from 1.4.1943 to 31.3. 1944. The submission of the
assessee was that the business carried on during the charge-
able accounting period under consideration was not separate
to and distinct from the business carried on in 1940-41. The
Excess Profit Tax Officer held that business carried on
during October, 1940 to October, 2941 was completely differ-
ent from the business carried on during the chargeable
accounting period under consideration.
The Appellate Assistant Commissioner on appeal found
that the constitution of the firm during the chargeable
accounting period was the same as in 1940-41 and the ac-
counts were maintained in the same fashion; and that the
same business of manufacturing Katechu in Nepal and selling
the finished products at kanpur was carried on. The Appel-
late Assistant Commissioner, therefore, held that the asses-
see was entitled to set off in respect of the deficiency of
profits accruing in the year 1940-41. The Appellate Assist-
ant Commissioner further found that the assessee had effect-
ed sales only during 30th May, 1941 to 29th September, 1941.
As such there were no sales either during or until 30th May,
1941 land subsequent to 29th September, 1941. As such he
held that there was no profit arising during the accounting
period ending on 31st March, 1941. He, therefore, confirmed
that there were no profits and losses during the chargeable
accounting
607
period ending on 31st March, 1941 and as such there could be
no deficiency of profits. In the premises, according to the
Appellate Assistant Commissioner, the assessee was entitled
to a set off of the deficiency only for the chargeable
accounting period ending on 31st March, 1942 which consisted
of the period 1st April, 1941 to 29th September. 1941. He
allowed such deficiency of Rs.5,600 only. So far as the
deficiency pertaining to the period November, 1942 to 3 Ist
March, 1943 was concerned, the facts were that the manufac-
turing operations started in Nepal on or about 23rd Novem-
ber, 1942 and the sales of Katechu started at Kanpur on 26th
July, 1943 Katechu produced in Nepal from 23rd November,
1942 to 31st March, 1943 remained in stock till the last
date of the chargeable accounting period namely 31st March,
1943 and no part of it was sold. As the assessee did not
maintain any books of account, the provisions of section 13
of the Income Tax Act, 1922 as applied to the Act vide
section 21 of the Act were applicable. The revenue, there-
fore, valued the stock-in-trade at cost and held that there
could be no profit or loss during the chargeable accounting
period. In appeal, the assessee had urged that deficiency in
profits pertaining to the chargeable accounting periods from
October, 1940 to 31st March, 1941 and 23rd November, 1942 to
31st March, 1943 should be allowed a set off in computing
the excess profits for the year under consideration. It was
submitted that there was no profits pertaining to the said
chargeable accounting period, and therefore, the standard
profits as provided in the Act became the deficiency of the
said two chargeable accounting periods which should have
been allowed set off. It was further urged on behalf of the
assessee that the manufacturing operations were carried on
during the said periods and as such it could not be said
that the assessee did not carry on any business.
The Tribunal, however, held that no profits accrued
unless sale was effected and, therefore, there was no merit
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in the submission made on behalf of the assessee that during
the said two chargeable accounting periods, although there
were no sales effected, yet profits accrued to the assessee.
It was urged on behalf of the revenue that as provided in
the Act, the provisions of the Act would apply to every
business of which any part of profits was made during the
chargeable accounting period, is chargeable to income-tax.
It was further urged that no part of profits, if any, which
accrued during the said two chargeable accounting periods
could be charged and were in fact not so charged, to
income-tax, as no sales were effected and, therefore, the
Act itself did not apply to the said two chargeable account-
ing periods. The Tribunal accepted this contention on behalf
of the revenue and as
608
such confirmed the order of the Appellate Assistant Commis-
sioner.
On the said facts, the following question of law was
referred to the High Court at the instance of the assessee:
"Whether, on the facts and in the circum-
stances of the case, the assessee was entitled
to a set off of deficiency of profits relating
to the period 28.10.1940 to 31.3.1941 and
23.11. 1942 to 31.3.1943 from the profits of
the chargeable accounting period 1.4.1943 to
31.3.1944 in accordance with the provisions of
the E.P.T. Act, 1940?"
The High Court held that it was not disputed before them
that the assessee was carrying on the same business from
28th October, 1940 to 4th April, 1944 for the purpose of the
Act. The only question was whether the assessee could be
said to have suffered any deficiency of profits during the
period 28th October, 1940 to 31st March, 1941 and 23rd
November, 1942 to 31st March, 1943 and was whether entitled
to be given the benefit of such deficiency. of profit.
The High Court referred to certain definitions and
recognised and in our opinion rightly that there were sever-
al stages in business activities before profits could be
realised. The High Court observed that profits realised were
not of the sale alone. The profits were attributable to the
manufacturing operations as well. The High Court referred to
certain decisions to which our attention was also drawn
where under the Act as to the place where the profits arose,
the courts had enquired into the place where the manufactur-
ing took place and where the sales took place. This conten-
tion is no longer relevant for the controversy before us. It
was accepted before us that a manufacturing process may
begin in one year and result in sale in another year and
also that manufacturing process may take at one place and
sale at another place. For the purpose of computing the
profit of certain operation, it is true as the High Court
noted, that manufacture and sale might take place in two
different years.
The High Court held that though chargeable levy was an
annual charge and generally for the purpose of the levy of
the annual charge the profits of the year preceding the year
of charge are taken into consideration if the manufacturing
activity leading to the production of finished article which
was subsequently sold contributed to the profits realised,
according to the High Court, it mattered little whether or
not the manufacturing activity of the sale related to the
same period of
609
twelve months. Some part of the profits realised would be
attributable to the manufacturing activities and, therefore,
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could be said to arise during the period when manufacturing
was carried on even though sales were effected in the next
year. The High Court, therefore, was of the view that it was
necessary to ,determine what part of the profits realised
upon the sales from 30th May, 1941 to 29th September, 1941
could be attributed to the manufacturing activity between
28th OCtober, 1940 to March, 1941 and then to compute the
deficiency of profits for the chargeable accounting period
ending 31st March, 1941. That might require, according to
the High Court, a fresh determination of the profits earned
during the period 1st April, 1941 to 29th September, 1941
and, consequently, of the deficiency of profits during the
chargeable accounting period ending 31st March, 1942. The
High Court was of the view that the deficiency of profits
for the chargeable accounting periods ending 31st March,
1941 and 31st March, 1942 would have to be set off when
computing the excess profits for the relevant chargeable
accounting period ending 31st March, 1944. The High Court
expressed the view that under section 2(5) of the Act the
job of the assessee in the extraction and sale of Katechu
under the two jungle leases must be considered as a single
business for the purpose of the Act. The High Court, there-
fore, came to the conclusion that upon the principle of
apportionment of profits to which it had adverted to, the
profits earned upon sales effected during the chargeable
accounting period ending 31st March, 1944 must similarly be
apportioned between the manufacturing activity during the
chargeable accounting period ending 31st March, 1943 and the
sales during the chargeable accounting period ending 31st
March, 1944 and the deficiency of profits worked out on that
basis in respect of the chargeable accounting period ending
3 Ist March, 1943 must be set off in computing the excess
profits for the chargeable accounting period ending 31st
March, 1944. The High Court, therefore, did not accept the
opinion of the Tribunal that because the chargeable account-
ing periods ending 31st March, 1941 and 31st March, 1943
were occupied with manufacturing activity alone and there
were no sales, therefore, no part of the profits realised
upon the sales could be apportioned to those chargeable
accounting periods and consequently that it could not be
said that there was any deficiency of profits during those
periods. The question referred to the High Court was an-
swered in affirmative.
In order to appreciate the real controversy in this
matter, it is appropriate to refer to the observations of
Kania, J., as the Chief Justice then was, in the decision in
the case of Commissioner of Income
610
Tax, Bombay v. Raipur Manufacturing Co., Ltd.; 14 ITR 725 at
733. It was observed as follows:
"The Excess Profits Tax Act as shown by the
preamble itself is a legislation to impose tax
on excess profits arising out of certain
business. The Income-tax Act is the principal
legislation which imposes a tax on the income
of a person. Section 6 divides the income
under five heads which are chargeable to tax.
The fourth head is profits and gains of busi-
ness, profession or vocation. Out of that a
certain portion is carved out by the Legisla-
ture for the purpose of imposing the excess
profits tax. I am unable to accept the conten-
tion of the Commissioner that the Excess
Profits Tax Act is an entirety independent
legislation, which is connected with the
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Income-tax. Act only to the extent it is
expressly so stated in the Excess Profits Tax’
Act. The scheme that the Excess Profits Tax
Act is a legislation intended to tax the
profits of certain business in excess of a
certain limit as provided in that Act. It is
therefore complementary to the Income-tax Act
by its very nature."
As the Statement of Objects of the Act stated that the
outbreak of war, while it has necessitated greatly increased
expenditure by the Government on defence and other services,
has simultaneously created opportunities for the earning by
companies and persons engaged in business of abnormally
large profits. The object of the Bill (which later became
the Act was to secure for the Government a considerable
portion of the additional business profits which accrued as
a result of the conditions prevailing during the war. To
begin with the right to impose a tax of 50% of the excess of
the profit made in any accounting period after the 1st day
of April, 1939 was given. It had subsequently been increased
to 66-2/3 %.
Section 2(1) of the Act defines the ’accounting period’.
Section 2(6) defines ’chargeable accounting period as (a)
any accounting period falling wholly within the term begin-
ning on the 1st day of September, 1939, and ending on the
31st day of March, 1946 and (b) where any accounting period
falls partly within and partly without the said term, such
part of that accounting period as fails within the said
term. The ’standard profits’ is defined under section 2(2)
which was required to be computed in accordance with the
provisions of section 6 of the Act. It is not necessary in
view of the controversy before us to refer to other defini-
tions except that section 2(3) deals with ’average
611
amount of capital’ which is relevant for computation of the
excess profits. Section 6 defines the ’standard profits’ and
how it is to be computed. As there was no controversy on
this aspect before us, it is not necessary to deal with it.
Section 2(9) defines ’deficiency of profits’ as follows:
(9) "deficiency of profits" means--
"(i) where profits have been made in
any chargeable accounting period, the amount
by which such profits fall short of the stand-
ard profits;
(ii) where a loss has been made in any charge-
able accounting period, the amount of the loss
added to the amount of the standard profits;"
Section 4 defines ’charge of tax’ as follows:
"Charge of tax"--( 1 ) Subject to the provi-
sions of this Act, there shall in respect of
any business to which this Act applies, be
charged, levied and paid on the amount by
which the profits during any chargeable ac-
counting period exceed the standard profits a
tax (in this Act referred to as "excess prof-
its tax") which shall, in respect of any
chargeable accounting period ending on or
before the 31st day of March, 1941, be equal
to fifty per cent, of that excess and shall,
in respect of any chargeable accounting period
beginning after that date, be equal to such
percentage of that excess as may be fixed by
the annual Finance Act;
Provided that any profits which are,
under the provisions of sub-section (3) of
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section 4 of the Indian Incometax Act, 1922,
exempt from income-tax, and all profits from
any business of life insurance shall be total-
ly exempt from excess profits tax under this
Act.
Provided further that in the. case
of any business which includes the mining of
any mineral, any bonus paid by or through the
Central Government in. respect of increased
out-put of the mineral shall be totally exempt
from excess profits tax under this Act.
(2)Where a chargeable accounting period falls
partly
612
before and partly after the end of March,
1941, the foregoing provisions of this section
shall apply as if so much of that chargeable
accounting period as falls before, and so much
of that chargeable accounting period as falls
after, the said end of March were each a
separate chargeable accounting period, and as
if the excess of profits of that separate
chargeable accounting period were an appor-
tioned part of the excess of profits arising
in the whole period determined in accordance
with the provisions of section 7A."
Section 7 deals with the relief on occurrence of defi-
ciency of profits and provides in substance that where a
deficiency of profits occurs in any chargeable accounting
period in any business, the profits of the business charge-
able with excess profits tax shall be deemed to be reduced
and relief shall be granted according to the provisions laid
down therein.
The main question in this case is to keep the distinc-
tion between ’accounting period’ and ’chargeable accounting
period’. The accounting period, it has to be borne in mind,
is the twelve months’ proceeding just on the basis of the
income-tax year and the assessment must be made on the same
basis. The ’chargeable accounting period’ is the period
beginning from 1st September, 1939 ending after amendment on
31st March, 1946. So if there is any deficiency of profits
in any of the accounting period which has not been absolved
in the assessment for that year may be carried forward but
the assessment must be made on the basis of the accounting
period. This has to be emphasised and it must be borne in
mind that though it is wholly immaterial whether the manu-
facture and sale took place in the same year or in two
different years, the division of time into periods for its
assessment must be made in a real sense as in the income-tax
one, and then make appropriate adjustments. Therefore the
profits and losses of each year must be computed on yearly
basis in terms of the definition of ’accounting period’
under section 2(1) of the Act. But if any deficiency of
profits remains unabsolved, it may be carried forward
against any excess profits made and set off during the next
accounting period. The chargeable accounting period is the
period from 1st September, 1939 to 31st March, 1946. But
each year’s excess profit & loss must be computed in the
manner contemplated in section 2(1) of the Act. So if there
was any deficiency of profits in any particular period, it
must be determined on that basis. In order to work out the
scheme of the Act, there must be proper devetailing of the
concept of "accounting period",
613
"chargeable accounting period" and basic scheme of the
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Income-Tax Act bearing in mind that excess profits are
excess of profits which were intended to be mopped up during
the war period intended to be taxed separately and differ-
ently. This view finds support in the decision of the Alla-
habad High Court. In the case of Haji Rahmat Ullah and Co.
v. Commissioner of Income-tax, U.P., 59 I.T.R. 109 the High
Court of Allahabad held that a payment received in any year
subsequently to a chargeable accounting period is not liable
to be treated as the profits of that period, merely because
the work which occasioned that payment was done during that
period. The "profits during the chargeable accounting peri-
od" are those profits respecting which a right to receive
had accrued or arisen during that period. If the right to
receive those profits had accrued or arisen subsequently,
then even though they had accrued or arisen by reason of
work done during the chargeable accounting period, these
were not liable to be treated as the profits of that charge-
able accounting period. The High Court observed that it
would seem ex facie that if the profits earned during a
certain period are taxable under the Income-tax Act, it is a
part of those very profits which is liable to excess profits
tax. Whether the profits in the one case could be identified
with the profits in the other would be determined by refer-
ence to the period in which those accrued or arose. It was
emphasised that the profits during the chargeable accounting
period must be computed under the Excess Profits Tax on the
same basis as are profits for an income-tax assessment. It
is clear that excess profits tax is attracted in respect of
a business to which the Act applied when the profits during
the chargeable accounting period exceed the standard profit.
It has to be clearly borne in mind that the Act is not an
entirely different Act in the sense that it proceeds upon
the concept completely different from the notions of Income
tax and has its source in an entirely different tax concept.
More profits which were likely to have been earned during
those years, these were made subject to excess profits.
It appears to us that the period of assessment in the
Act is an "accounting period" in the same way as the ’previ-
ous year’ is the period of assessment for the purpose of
Income-Tax. Though profit in a composite transaction could
be apportioned as between manufacture and sale in the same
accounting year, such an apportionment is not permissible
when one part of the transaction, i.e. manufacture, fails in
one chargeable accounting period and falls in another part
of the accounting period i.e. the trading operations, i.e.
falls in another accounting period, then set off of defi-
ciency in profits under section 7 of the Act is permitted
but a necessary precondition was that profit
614
must be made in the accounting period to which the deficien-
cy relates. The profits attributed on apportionment was
outside the scope of section 7 of the Act. It must be remem-
bered that the ’excess profit’ under the Act is profit
determined under the Income Tax Act subject to prescribed
adjustments.. If the income tax assessment discloses nil
profits, no separate profit can be determined independently
under the Act.
The position of the Excess Profits Tax Act was explained
by Lord President Clyde in Edward Collins & Sons. Ltd. v.
The Commissioner of Inland Revenue, 12 T.C. 773 at 780 where
the Lord President emphasised that subject to certain modi-
fication those profits had to be determined in the same way
and on the same principle as a trader’s profits and gains
have to be computed for the purposes of the Incometax Act.
It is a general principle, in the computation of the annual
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profits of a trade or business under the Income Tax Acts,
that those elements of profit or gain, and those only, enter
into the computation which are earned or ascertained in the
year to which the enquiry refers; and in like manner, only
those elements of loss or expense enter into the computation
which are suffered or incurred during that year. The same
principle, in our opinion, would be applicable to the facts
of this case.
The decision of this Court in Commissioner of Income-
tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay, 18 I.T.R.
472 related entirely to a different context where certain
part of the activities occurred at Raichur and the sales
took place in Bombay, the question was whether the activity
which the assessee carried on at Raichur was part of their
business within the meaning of the third proviso to section
5 of the Act, that the profits of a part of the business,
the manufacturing of oil in their mills at Raichur, accused
or arose at Raichur and that such profits were not assessa-
ble to excess profits tax under the third proviso to Section
5 of the Act. That is not the controversy here.controversy
is not so much where the profits arose nor is the controver-
sy whether the profits arose during the chargeable account-
ing period but where the profits arose during the ’account-
ing period’ and as such whether the deficiency of the prof-
its not arising during ’counting period’ but during the
’chargeable accounting period’ could be set off without
computation. The method of computation under section 7 of
the Act must be on the basis of ’accounting period’ and
after that the deficiency in profits for that period should
be computed on that basis and after set off carried forward
to be set off during the chargeable accounting period. It is
thus an harmonious construction of
615
the different provisions of the Act is possible and the true
excess profits, if any, as contemplated by the Act be deter-
mined. The concept of ’accounting period’ in the background
of the ’chargeable accounting period’ can thus be harmo-
nised. The accounting period was 1st April, 1943 to 31st
March, 1944. In the facts of the case we are of the opinion
that the question must be answered in the negative and in
favour of the revenue. The appeal is allowed and the judg-
ment and order of the High Court are set aside.
In the facts and circumstances of the case, parties will
pay and bear their own costs.
A.P.J. Appeal
allowed.
616